March 29, 2021

Smart Money Trading - Key Concepts and Strategies

As you no doubt already know, over 90% of forex traders lose money overall and end up quitting.

Smart Money Trading - Key Concepts and Strategies

With the market being a zero sum game, this means that just 10% of forex traders are profitable, taking money from the losing 90%.

In an environment such as this, it’s hard to find success, but by understanding what the smart money is doing, you’re able to ride on their coattails toward success.

Smart Money Concepts in Forex

Smart money doesn’t refer to a trader’s intelligence as such, but more to their influence on the market.

Usually bigger players such as banks or institutional money, these traders are able to use their sheer size to influence the market.

This isn’t saying that the forex markets are corrupt or that institutional players have somehow gained inside knowledge over those of us in the retail trading sphere.

It’s just that with an understanding of market psychology and large position sizes that can move a market, the smart money is able to position themselves to really take advantage.

Banks aren’t in the game to lose and are primed for success.

Often at the expense of the retail trading crowd who we know are often crazy enough to try and swim against the tide.

Who’s Actually Behind Smart Money?

As we mentioned above, smart money refers to the top end of town.

We’re talking about central banks, hedge funds, institutional investors, market makers and the like.

smart money forex strategy

All of which make up what we know as the interbank market.

It’s here that the smart money is able to wield their influence over forex markets, pushing price just that little bit further to soak up any obvious pools of liquidity required to place positions the size that these institutions require.

It’s not that these players necessarily know more than is available to the rest of the market, it’s just that they’re ruthless when it comes to using that information.

How to Trade in the Direction of Smart Money

But not all is lost for retail forex traders.

It’s certainly possible for smaller players to make money in a forex market that’s primarily driven by smart money trading.

You just have to know how to take advantage of market moves and positions that institutions have set up for themselves, then align your thinking alongside the smart money.

As we mentioned above, there is no insider trading going on here and this information is actually readily available for all to see.

While releases such as the Commitments of Traders (COT) report focuses on currency futures, there are actually a number of other sources that traders wanting to identify smart money trades can use.

FXSSI’s very own order book indicator for MT4 for example, uses forex broker data to help retail traders make better informed decisions around their positioning.

Trading with the Smart Money

Now that we’ve gone over some of the major smart money concepts in forex, let’s move forward to discover how retail traders are able to take advantage of this knowledge.

If retail traders can implement trading strategies that are aligned to those implemented by banks and institutional traders, then they’re obviously going to have a higher chance of achieving long term profitability.

This isn’t to say that other trading strategies won’t work, because that’s not the case.

But forex trading is primarily a game of probabilities and trading a strategy that aligns your thinking with those with the ability to move markets definitely pushes the odds further in your favour.

Smart Money Trading Strategy 1: Analysing the Order Book

One strategy that allows you to trade in the direction of smart money uses the FXSSI order book analysis indicator to help view how the market is positioned.

From here, you’re able to analyse market sentiment of your chosen forex currency pair directly from within your MT4 trading platform.

The premise of this strategy is that you want to be doing the opposite to what the crowd of retail traders are doing, because you know that the smart money will take advantage of their predictable order placement.

The left side of the order book displays all of the pending orders such as take profit and stop loss orders, whereas the right displays trades that are currently open.

Take a look at the following screenshot of our order book indicator attached to the EUR/USD hourly chart:

trading with smart money

You can see that retail traders are net long, but the market continues to fall.

By using the indicator to identify what the herd is doing, you can make better informed decisions and ultimately trade against them alongside the smart money.

The order book indicator will allow you to:

  • Find the largest stop loss clusters.
  • Identify key market levels that institutions are likely to target.
  • Determine where the next move is likely to originate from.

Smart Money Trading Strategy 2: Taking Advantage of Traps

A second strategy that allows you to trade with the smart money, uses another FXSSI indicator called the stop loss clusters indicator to view areas where stop orders have pooled.

You’re going to notice that these usually pool around major swing highs/lows or psychological round numbers.

All a cluster really implies is that there are a significant number of stop loss orders just waiting to be filled.

With this knowledge, you’re able to see zones on your chart that the smart money is likely going to target because to them, stop loss clusters mean liquidity.

Liquidity required to get a larger position filled, without incurring too much price slippage as they enter.

smart money concepts forex

The above screenshot shows our SLC indicator at work on the EUR/USD 15 minute chart.

What we see here is a smart money position being filled at liquidity identified by the indicator, all the way through to the subsequent closing of the position at demand.

Clusters like this act as a sort of fuel for smart money and if you know where they’re placed, you’re able to:

  • Avoid placing your stops in obvious places that already feature clusters likely to be targeted.
  • Follow smart money as they attempt to stop hunt the market and take advantage of liquidity clusters.

Final Thoughts on Smart Money Trading

Becoming a consistently profitable forex trader is no easy feat.

But by understanding the concepts around smart money and then implementing trading strategies to take advantage of what you’ve learned, you can help shift the odds in your favour.